Economics is a notoriously imperialist discipline: economists are more prone to colonising other scholarly fields than to be colonised by them. The single biggest exception was Daniel Kahneman, the social psychologist who was awarded the 2002 Nobel Memorial prize in economic science for how he revolutionised the field.
It was in the 1970s and early 1980s that Kahneman, who has died aged 90, carried out the path-breaking research in the psychology of decision-making that would upend economics, much of it with his collaborator Amos Tversky (who died in 1996). They showed that humans faced with uncertain situations tend to make judgments and take decisions based on systematic biases. People rely as much on flimsy as on solid evidence of what the probable outcomes are; they are guided less by probabilities than by how closely a situation represents preconceived ideas; they care about changes rather than absolute levels of, for example, wealth, and care more about losses than they do equally sized gains; they also have a propensity to stick with the status quo.
These are just some of the patterns Kahneman and Tversky documented, several of which they incorporated into “prospect theory”, their model of how people make choices in the face of risk and uncertainty. This flew in the face of the theory of rational decision-making that was fundamental to economics. Kahneman later reminisced that they had not set out to challenge economists’ concept of rationality. “I realised only recently how fortunate we were not to have aimed deliberately at the large target we happened to hit. If we had intended [an influential 1974 article in Science] as a challenge to the rational model, we would have written it differently, and the challenge would have been less effective.”
Effective it certainly was. Kahneman and Tversky’s work caught the eye of Richard Thaler, then a young economist with a sceptical eye on his own field, who was the first to incorporate their insights into economic modelling. This quickly caught on, as their work helped explain behaviour that did not fit economists’ standard theory of consumer choice. In the ensuing decades, psychological biases were documented and used to explain a variety of economic topics, from consumer behaviour to development, to labour markets and financial market anomalies. The field of behavioural economics was born.
Kahneman and Tversky were “the founders of our field”, says Ulrike Malmendier, a behavioural economist at the University of California, Berkeley. Its success, she says, has been “overwhelming”. Malmendier, a member of the German official council of economic experts, points out that not only has the behavioural approach gained acceptance throughout most of economics, it is also appreciated by policymakers.
“Whenever I’m talking with the highest level of politicians, I can be sure to get a question asking ‘well, you as a behavioural economist, how would you think about such-and-such?’ People are aware that we have other tools than standard carrot-and-stick economic incentives.”
This interest can in part be credited to Kahneman himself, who popularised his research in the 2011 book Thinking, Fast and Slow. Yet he remained slightly bemused at the influence his work ended up having. When he received the Nobel Prize, he remarked that “I have been mostly cheering Thaler and behavioural economics from the sidelines”. The paper on prospect theory, he said, was influential only because it was published in the highly prestigious journal Econometrica — “What impresses me is how chancy this is, that is this is entirely accidental . . . if we’d published that word for word [elsewhere] there would have been no Nobel Prize for this work today.”
Those who knew Kahneman stress his unfailing interest in what other people thought. Younger scholars praise his lack of defensiveness about his work, and his eagerness to see it overtaken by new research. His list of co-authors is a who’s who of economics and other fields. He once told the FT that “everything I’ve done has been collaborative.”
Kahneman was born in Tel Aviv and was based in Israel during the postwar decades before moving to the US later on. But he spent his childhood in Paris and Nazi-occupied France. He was seven or eight when he walked home from a friend after the curfew imposed on Jews and encountered an SS man. Despite young Daniel’s fear that his hidden yellow star would show, the Nazi lifted him up to hug him, then emotionally showed him a photo of a boy, and gave him some money. “I went home more certain than ever that my mother was right: people were endlessly complicated and interesting.” Martin Sandbu
